Federal District Court Dismisses Challenges to New York ZEC Program

On July 25, 2017, two weeks after an Illinois federal judge issued a similar ruling, the U.S. District Court of the Southern District of New York (“District Court”) issued an order dismissing challenges to a New York state “zero emission credit” (“ZEC”) program established by the New York Public Service Commission (“NYPSC”). As with the Illinois court’s decision regarding the Illinois ZEC program (see July 25, 2017 edition of the WER), the District Court found the New York ZEC program constitutional and determined that the challengers lacked a private right of action to challenge the New York ZEC program on preemption and dormant commerce clause grounds. Nevertheless, the District Court reached, and rejected, the merits of those challenges. On August 24, 2017 the case was appealed to the U.S. Court of Appeals for the Second Circuit.

On August 1, 2016 the NYPSC issued an order adopting a Clean Energy Standard (“CES”) encompassing various sustainable energy policies, including a ZEC program—which was the first such policy explicitly designed to assist financially “at-risk” nuclear energy generators. Through the NYPSC’s ZEC program, a nuclear generator is eligible to sell ZECs for extra revenue based on certain “public necessity” factors, including: that the generator has a history of contributing to the clean energy resource mix consumed by in-state retail consumers, and that existing energy, capacity, and ancillary services revenues are “insufficient to provide adequate compensation to preserve the zero-emission environmental values or attributes historically provided by the facility.” Under the program, eligible generators—currently the Fitzpatrick, Ginna, and Nine Mile Point nuclear facilities—enter into 12-year contracts with the New York State Energy Research and Development Authority (“NYSERDA”) and receive one ZEC for each MWh of production. New York load-serving entities must either contract with NYSERDA or with the nuclear generators directly to ultimately purchase the number of ZECs proportionate with their load share in the state.

As noted in the District Court’s order, ZEC prices are set for the first two years at the Social Cost of Carbon (“SCC”), as published by the U.S. Interagency Working Group, “less the generator’s putative value of avoided greenhouse gas emissions less the amount of the forecasted energy price.” Thereafter, ZEC prices will be based on several factors, including the estimated SCC for that year, the amount of renewable energy being consumed in the state, as well as the market revenue forecasts for the associated two-year period. In sum, the District Court stated, “if the forecast wholesale price of electricity increases, the price of a ZEC decreases.”

A group of generators, led by the Coalition for Competitive Electricity, filed a complaint in the District Court arguing that the ZEC program is conflict and field preempted by the Federal Power Act (“FPA”) and that it violates the dormant Commerce Clause doctrine. On the first issue, the plaintiffs principally argued that the ZEC program is field and conflict preempted by the FPA according to the Supreme Court’s decision in Hughes v. Talen Energy Mktg., LLC, 136 S.Ct. 1288 (2016) (see April 27, 2016 edition of the WER) because it is “tethered” to the wholesale auctions administered by the New York Independent System Operator (“NYISO”), FERC’s approved grid operator and wholesale market administrator for the state. On the second issue, the plaintiffs argued that the ZEC program violates the dormant commerce clause doctrine for allegedly facially discriminating against out-of-state energy producers, including nuclear and other carbon-free, energy producers, and that it unduly burdens interstate commerce by distorting market pricing and incentives. The defendant, the NYPSC, moved to dismiss on procedural and substantive grounds, which the District Court ultimately granted in its decision.

Procedural Challenge

The District Court granted the NYPSC’s motion to dismiss for failure to state a cause of action to raise preemption and dormant commerce clause challenges. On the matter of preemption, similar to the Illinois federal court, the District Court concluded that the FPA does not expressly provide a private right of action for preemption claims (aside from a narrow exception in the Public Utility Regulatory Policies Act) and the court’s ability to hear such claims through its so-called “equity jurisdiction” is subject to express and implied statutory limitations. In the District Court’s estimation, “[t]he FPA tacitly forecloses private parties from invoking equity jurisdiction to challenge state laws enacted in alleged violation of the FPA because Congress implicitly provided a ‘sole remedy’ in the FPA—specifically, enforcement by FERC.” Despite this holding, the District Court nonetheless proceeded to the merits of the plaintiffs’ preemption and dormant commerce clause challenges.

Preemption

In determining that the New York ZEC program is not preempted by the FPA, the District Court relied on the Supreme Court’s recent preemption decisions, particularly Hughes, which involved a Maryland program that guaranteed more favorable contract prices for certain generators participating in wholesale capacity auctions. The Supreme Court in Hughes concluded that the Maryland program was preempted by the FPA for disregarding the FERC-approved market clearing price mechanism through competitive auctions and essentially setting its own interstate wholesale rate. The Supreme Court noted, however, that States remained free to “encourag[e] production of new or clean generation through measures ‘untethered to a generator’s wholesale market participation.’” As the Court concluded, “so long as a State does not condition payment of funds on capacity clearing the auction, the State’s program would not suffer from the fatal defect that renders Maryland’s program unacceptable.”

On the matter of field preemption, the District Court rejected the plaintiffs’ principal arguments that the ZEC program was “tethered” to NYISO’s wholesale auction because the ZEC prices are based on forecasted wholesale rates and that ZEC-receiving generators are selling their output in the capacity markets. The District Court determined that the program did not run afoul of Hughes in part because that case “clearly stated that the impermissible tether was ‘to a generator’s wholesale market participation,’” not to market-based price forecasting. Moreover, the District Court determined, this participation was not problematic because, unlike with the Maryland program in Hughes, “[t]he CES Order itself does not require the nuclear generators to sell into the [wholesale] auction.”

Applying both the Supreme Court’s decision in FERC v. Elec. Power Supply Ass’n, 136 S. Ct. 760 (2016), as well as the Second Circuit Court of Appeals’ decision in Allco Fin. Ltd. v. Klee, 861 F.3d 82 (2d Cir. 2017) (see July 10, 2017 edition of the WER), the District Court also determined that the plaintiffs failed to plausibly allege that the ZECs “directly affect” FERC-jurisdictional wholesale rates, as opposed to only indirectly affecting them. Specifically, the District Court stated, because the ZEC sales are separate and independent from wholesale capacity and energy sales, unlike the Maryland program that the Hughes Court found “set” a wholesale rate, “the ZEC program does not adjust or ‘set’ the amount of money that a generator receives in exchange for the generator’s sale of energy or capacity into the auction.”

Lastly, the District Court also rejected plaintiffs’ conflict preemption arguments against the ZEC program because, under the Supreme Court’s decision in Oneok, Inc. v. Learjet, Inc., 135 S. Ct. 1591 (2015), nothing about the ZEC program effectively overrides or “stands as an obstacle” to the FERC-jurisdictional auction or to the FPA. In the District Court’s estimation, any price-distorting effects from the ZECs are not enough to trigger the conflict preemption bar. Otherwise, the Court stated, this would call into question Renewable Energy Credits, and all other forms of state subsidies, such as tax incentives and land grants.

Dormant Commerce Clause

The District Court also found that plaintiffs lacked a cause of action under a dormant commerce clause theory. First, the District Court determined that the plaintiffs were outside the “zone of interests” protected by the dormant commerce clause because they did not allege that they own or represent out-of-state nuclear power plants. Second, the court rejected the plaintiffs’ “undue burden” argument because non-nuclear generators would presumably still be injured even if ZECs were awarded to out-of-state nuclear generators. Finally, the District Court determined that even if plaintiffs had a cause of action under the dormant commerce clause, it would fail because New York acts as a market participant and not as a regulator when it “pays nuclear power plants a set dollar amount for each MWh of electricity they produce in recognition of the zero-emission attributes of their electricity.”

A copy of the District Court’s Opinion can be found here. On August 24, 2017, the decision was appealed to the U.S. Court of Appeals for the Second Circuit.

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